These aren’t easy times for LatAm’s private bankers, as commodity prices remain far below their peaks of just a few years ago, and many of the region’s HNWIs have moved away. But new wealth could soon be flowing back into South and Central America and the Caribbean, as tax amnesty schemes in Argentina and Brazil, ahead of the introduction of the global Common Reporting Standard, could, some experts say, begin suck some of the squirreled-away billions back onshore. Paul Golden investigates…
Falling commodity prices and economic and political turmoil have hit Latin America’s ultra-wealthy hard, causing a split between those private banks that are willing to ride out the turbulence, at least for now, and those which have chosen to focus their resources elsewhere.
The challenges facing the region’s private banks were highlighted in an unblinking report published by Deloitte in March, entitled Global Market, Global Clients But Local Specificities. It found that of the 75 institutions across 27 countries it surveyed, Latin America was regarded as the world’s least attractive region for “cross-border activities”.
Specifically, half of respondents expected to reduce their geographical reach in the region over the next five years, while only one in four predicted expansion.
Recent uncertainty over the region’s short/mid-term political and economic outlook had, the report found, resulted in substantial risk aversion among these institutions, and most of the wealth managers and private banks surveyed said they were expecting to decrease their geographical presence in Latin America over the next five years.
Still, the 2016 edition of the BCG (Boston Consulting Group) Global Wealth report, which looked at the state of the various world markets in 2015, found that private wealth in Latin America grew by 7%, to $5trn in 2015 – a lower rate than that recorded in the previous year, but still better than the global average growth rate, which fell to 5.2% from more than 7% in 2014.
BCG observes in the report that the region’s wealth expansion was reined in by poor equity market performance in its two largest economies, Brazil and Mexico, which together account for more than half the region’s wealth.
A glimmer of hope for Latin American banks, however, began to emerge midway through 2016, as the scale of the wealth being reported to certain LatAm government tax authorities by wealthy individuals taking advantage of much-publicised tax amnesty schemes – billed as their last chance to “come clean” with their offshore wealth, ahead of the pending implementation of the Common Reporting Standard – began to emerge.
The CRS is an OECD-promoted scheme which, beginning in 2017, will see the first-ever automatic exchange of tax-relevant information between countries on a global scale. As of 2 November, some 87 countries had signed up to the scheme, including Uruguay (sometimes referred to as South America’s Switzerland), as well as Argentina, Brazil, Chile and Colombia, and such Caribbean islands as the British Virgin Islands, the Cayman Islands and Bermuda.
On 1 November, the Brazilian government announced it had collected the equivalent of US$15.8bn in taxes and fines under its tax amnesty, after the equivalent of around US$50bn in undeclared offshore assets was reported.
Argentina’s wealthy, meanwhile, had declared approximately US$4.6bn by about the same point, but with two more phases of that country’s three-phase amnesty programme yet to go, experts there were saying US$40bn to US$70bn could yet be declared by Argentine taxpayers by the end of next March.
Bloomberg quoted BNP Paribas as estimating that the Argentinian amnesty “could bring in US$116bn in offshore money”, which it noted would be “almost double the size of the local mutual fund industry”.
As if it were needed, the BCG report acknowledged that there has, at least until now, been a historic trend among Latin Americans to keep their money offshore, noting that the region was the global front-runner in this area, with approximately 25%, on average, of total private wealth held elsewhere.
Still, it’s one thing to declare one’s overseas assets for tax purposes, another to bring them back home and stick them in one’s local bank, as Latin America’s bankers are well aware.
And as the BCG report notes, Latin Americans aren’t banking outside of their home countries just to avoid paying tax, but also to gain access to financial products not available to them at home, as well as to ensure their money is well away from the high levels of economic and political turmoil endemic in the region.
James Edsberg, a partner at private bank management consulting firm Gulland Padfield, said there was definitely a “trend to bring more wealth [back] onshore” in Latin America, encouraged by the tax amnesties.
But he added that it “has been a very uncertain process, largely because of the stop-start approach of the region’s regulators and tax authorities”.
“Historically, the wealthiest families and individuals have kept the bare minimum onshore,” he added.
“That started to change recently, with the announcement of [the] tax amnesties.”
However, the firm’s recent LatAm high net worth research programme found a high degree of scepticism among the region’s wealthy about whether tax authorities in the region would stick to what they had announced, and not revisit the terms negotiated with individuals to bring wealth back onshore.
Added to this skepticism, they found, was an overriding concern, on the part of many of the wealthiest families, about whether the details of them and their wealth might be in danger of being leaked. This is always a concern in the region, where kidnapping for ransom is relatively common, by global standards.
(According to red24, the crisis management firm, Argentina, Brazil, Colombia, Venezuela and Mexico are all considered “high risk” countries for kidnapping, compared with the “low risk” US and Europe, and “medium risk” Russia, China and India.)
“Clients are also tired of excessive regulations and compliance requirements from their institutions, especially if those institutions are foreign banks [that have] the US Federal Reserve on their back,” says Felipe Watson, director of private banking at Banamex, Mexico’s second largest bank.
He suggests that private bank clients in Latin America are at the same time reluctant to follow their banker to lower-profile institutions, and are willing to switch banks if they are not satisfied with the service they are receiving.
“Their current investment preferences are to protect their investment in dollar term investments – fixed income or equity – and to look for real estate opportunities.”
Opportunity to grow
A truism of business has always been that there can be advantages in moving into a market that one’s rivals are staying out of. And it seems that a number of banking institutions have been seizing on the opportunity being presented to them by their rivals’ uncertainty about Latin America, in order to build market share there.
Earlier this year, Morgan Stanley’s head of international wealth management confirmed that the US-based bank would hire 75 advisers in the US in 2016, to target rich Latin Americans. (The bank declined to be interviewed for this story.) This followed on from a deal struck last year by Credit Suisse to recruit 35 advisers to look after wealthy Latin Americans, from a US base.
And in November, Bloomberg reported that UBS, Julius Baer and BTG were all reported to be considering launching or expanding wealth management operations in Argentina in particular, in response to that country’s tax amnesty haul.
In its report, Bloomberg quoted an analyst at Buenos Aires-based Schweber Securities as saying that the success of the tax amnesty programme “isn’t going unnoticed by the asset management industry”.
At the same time, the Bloomberg report went on, “some wealthy Argentines are creating local family offices to manage their assets, betting that President Mauricio Macri will continue to be more investor-friendly than previous administrations, and that the economy will resume growth with lower inflation”.
Alongside the Common Reporting Standard phenomenon, meanwhile, it seems that an earlier tax information exchange scheme – the Foreign Account Tax Compliance Act of the US, which has already been in force for a little over a year, after having been signed into law in 2010 – is also having an effect.
Banamex’s Watson noted that there has been a trend for private bank clients in Latin America to bring some of their investments back from the US, due to FATCA and state tax concerns.
Land of multiple accounts
A preference for maintaining more than one private bank account is said to be another feature of Latin American clients, banking experts there say. Both Watson and Edsberg refer to this phenomenon, with Edsberg noting that it is seen as a response at least in part to a pre-eminent concern of individuals and families in wealth protection, and in navigating the complex security, confidentiality and political uncertainty of their homelands.
At the same time, according to Edsberg, some of the European and US banks have severely damaged their brand reputations by having sold, or clumsily transferred and then closed, accounts with Latin American high net worth individuals and their families over the last three years.
“That leaves a huge opportunity for the international players that remain, as well as the regional banks and local boutiques, [which] are well placed to move into the vacuum of wealth advice left behind,” he concludes.
“The challenge is that local regional banks need to progress and build a credible private client advisory offering.”